Indiana’s Property Tax System: Fix it or Scrap it?

July 16, 2007

For immediate release 623 words

By Eric Schansberg

Hundreds of protestors in front of the governor’s residence — twice in one week . . . people afraid to receive their property tax bills — and then often angry when they look at them . . . property owners concerned about short-term tax bills and long-term property values. A system of taxation that is perpetually tweaked by legislators and often viewed as unjust by taxpayers. . . . the governor’s aides working 24/7 to look at policy proposals that deal with the short-term and long-term. . . . talk of a special session or even a constitutional convention for the legislature.

What are we, finally, going to do with property taxes in Indiana?

The recent unrest in Marion County is the most obvious symptom of deeper problems — with a 34 percent average increase in tax bills in the state’s largest city and the center of its state government. But beyond Indy, it is clear that many others are also unhappy about changes in assessments and property taxes — if not, this year, then recently.

As always, short-run prescriptions abound. Already, Gov. Mitch Daniels has given counties two more months to decide whether they should increase local income taxes to offset the prospect of higher property taxes, extending the deadline to Oct. 1. On Friday, Indy mayor Bart Peterson proposed borrowing $75 million to ease the burden on home-owners (but not renters), reducing their tax increases by up to 50 percent.

Another short-term approach simply speeds up the time frame on existing legislation. The state government passed a property tax maximum in 2006 (2 percent of assessed value), but it will not go into effect until 2008. It would take a special session of the legislature to put this provision into effect for 2007.

Short-term policy changes are important and maybe essential. But is that all our elected officials will do? In addition to applying band-aids over the immediate wounds, there are three choices: tinker with the system, overhaul the system, or eliminate property taxes on individuals (and collect those revenues from other taxes):

1. Is tinkering enough? Can politicians finesse this issue with the public? It may be that people are not yet upset enough to demand significant change. But it seems likely that we’ve passed that point.

2. What about an overhaul? The problem is that even significant changes to a deeply flawed system are unlikely to work. Politicians would get credit for a rare display of courage in attempting an overhaul. But any such change will certainly anger groups of people.

3. The third view holds that the system is so fundamentally flawed — and the public is sufficiently cynical — that changes within the current system are destined to fail practically or politically. The system is archaic; the assessments are arbitrary and inconsistent; and the uncertainty hurts people and reduces economic investment. If so, the best option would be to eliminate property taxes and replace that revenue stream with consumption or income taxes.

Some key politicians on both sides of the aisle have lined up for something dramatic. Governor Daniels is seriously considering a wide range of policy alternatives. House Speaker Patrick Bauer (D-South Bend) has encouraged “major surgery” in a special session. The chairman of the Tax and Fiscal Policy committee, Sen. Luke Kenley (R-Noblesville), has proposed elimination of the property tax with a 2 percent increase in income taxes and a 4 percent increase in the sales tax. (Taking this one step further, “Fair Tax” proponents have talked about a 10 percent consumption tax that would replace all three major sources of revenue.)

“If it ain’t broke, don’t fix it.” Well, the property tax system is certainly broke. Should we try to fix it again — or just scrap it?

D. Eric Schansberg, Ph.D., an adjunct scholar of the Indiana Policy Review Foundation, teaches economics at Indiana University (New Albany). He is the author of “Turn Neither to the Right nor to the Left: A Thinking Christian’s Guide to Politics and Public Policy.” Contact him at eschansberg@inpolicy.org.

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